Amazon’s recent acquisition of Whole Foods has triggered a lot of discussion about the motives behind the purchase. But many of these explanations can be rationalized by looking at Amazon’s primary mission, which says, “At Amazon, we are committed to being the most customer-centric company on earth.” That is not only a rather audacious statement; indeed, it is a tall order. And while some people may in the past have perceived the mission statement as purely aspirational, over time, with moves such as this acquisition, it is increasingly clear that Amazon is trying to make what seemed aspiration into a reality.
One way in which marketers often approach customer analysis is by studying what has been referred to as the customer’s “journey,” or the “consumption chain.” Essentially, studying this journey includes mapping the steps that a customer goes through when fulfilling a specific need, then trying to make sure that your company’s product can fulfill that need.
For example, let’s say a customer needs to wash clothes. With the consumption chain in mind, one can trace a number of innovations that detergent manufacturers have incorporated into their products over time. One step in the customer’s journey is knowing when it is time to buy more detergent. Accordingly, manufacturers introduced transparent “windows” in containers of liquid detergent so consumers could gauge when they were running low. Another step is the act of pouring the detergent. To help customers avoid making a mess on the side of the container or dripping detergent on the floor, manufacturers added spouts designed to ease pouring, as well as channels to allow excess detergent to drip back into the bottle. (Manufacturers are more reluctant to add clearer markings than they currently do on the insides of caps that would help customers measure detergent according to the size of their loads, since they would rather customers use more detergent than required.)
Amazon has taken the idea of mapping the customer’s journey beyond merely fulfilling a specific need to trying to address all the needs a customer might have over the course of a day. In many instances, this goal involves providing services that complete the need-fulfillment journey for specific categories. In the detergent example, after a customer recognizes that he needs to buy detergent, he still needs to go to the store, pick the product from the shelf, pay for it, come home, and use it. Amazon is able to help a customer complete nearly all of these steps through Amazon Prime Now, a single service that delivers products within two hours of an order.
The inexorable moves to map and fill a customer’s daily needs mean that Amazon is becoming increasingly central to the consumer’s experience.
But Amazon has gone beyond even this by creating ways to make the process simpler. The first is the Amazon Dash Button, a physical button that customers press when they need a specific product. If you’re running low on Tide detergent, press the Tide Dash Button that you’ve affixed to your washing machine to order more. However, while Dash buttons solved a specific problem, Amazon also created the Echo speaker, which takes voice commands. Echo obviates the need for multiple Dash buttons while also offering other, unrelated services, including the ability to control devices such as alarms and radios.
A customer’s daily activities include more than washing clothes, of course—they also include waking up, eating breakfast, taking a shower, getting dressed, going to work, returning from work, relaxing in front of the television, preparing dinner, and going to bed. It is not hard to see how, over time, Amazon has increasingly crept into these activities—by delivering groceries for breakfast, toiletries to use in the bathroom, clothes to wear, television and content to enjoy while relaxing, and more groceries as well as other food delivery for dinner. The inexorable moves to map and fill a customer’s daily needs mean that Amazon is becoming increasingly central to the consumer’s experience, as much as it is becoming more customer-centric in everything it does. This idea of occupying “adjacencies”—meeting customer needs proximal to those that you currently fulfill—has been a pillar of marketing practice for a long time. Amazon, for its part, has done this aggressively and expansively, by meeting a core or “primitive” need first, and then layering on top of this need to meet additional needs over time.
Scope, scale, and speed
To be more customer-centric, Amazon has clearly recognized the power of the three s’s: scope, scale, and speed. In order to become the one-stop destination for the consumer, what Amazon really needs is scope. The more products and services that consumers can find under one roof, and the more easily consumers can access these services, the more benefits consumers will see and accrue by engaging with Amazon.
But customers will not be attracted to Amazon if they find prices too high, which is where scale and efficiency come in. Having access to a very large customer base allows Amazon to obtain favorable terms from suppliers, while having efficient operations keeps a further lid on costs.
And then there is speed. One-stop, low-cost shopping is certainly attractive, but if a customer’s need is not immediately met, the shopping experience will not be fulfilling. This is where speed comes in: having more locations conveniently located close to the customer will enable Amazon to fill a variety of orders inexpensively and quickly. Delivering what the customer wants, when she wants it, at a price she is willing to pay is the ultimate value proposition.
But there are three things that Amazon needs in order to deliver the three s’s. First and foremost, it needs data, both external and internal. External data include information from Amazon’s own customer base and the customer bases that come in via acquired companies. It can mean data from the marketplace, which includes competitors and companies with other business models and innovations. Amazon also needs internal data. How are the internal processes doing? Where can they be improved? Are there bottlenecks that can be eliminated?
Amazon also needs innovation to retain and enhance its customer-centricity. This could be innovation in product (such as Alexa, the voice service that powers the Amazon Echo), process (such as delivery by drone), or content (such as the Amazon original TV series Fortitude). With Amazon facing ever-changing customer needs, the ability to marry data with innovation will be a key driver of the company’s future success.
Amazon cannot discount the possibility of upsetting customers as it engages more deeply in their lives.
Lastly, as the company increasingly moves from the online world to the offline, it needs to think of ways of replicating its platform strategy offline. The ability to offer a wide range of products online was made possible by bringing third-party sellers onto Amazon’s platform. These sellers provide mainstream products, plus they extend the breadth of product offerings by giving consumers access to more obscure products (those in the “long tail” of customer needs). This reinforces the consumer benefit from visiting and shopping on the Amazon site. Initial moves at Whole Foods seem to be going against this notion, however, as the acquired company announced a reduced emphasis on local suppliers. But Amazon needs to nevertheless explore ways in which it can better leverage physical locations as local platforms.
The idea behind the three s’s, and what is needed to support it, bears a strong resemblance to what Amazon refers to internally as the “flywheel.” In the traditional strategy literature, organizational “fault lines,” where one activity may require skills that are not consistent with those required for other activities, are associated with the organization’s need to manage the three s’s. What Amazon has been able to do thus far, and needs to continue to do, is manage effectively across these fault lines.
Putting the three s’s into action
Now let’s get back to the original question of why Amazon acquired Whole Foods and, in light of the above analysis, examine various reasons Amazon provided.
- One argument is that as grocery purchasing increasingly migrates online, Amazon will be able to use its access to Whole Foods to fulfill this need.
- Another is that Whole Foods can act as a distribution hub since it has urban and suburban locations. Because the locations have attractive demographic profiles, with high-earning residents, Amazon can physically reach its customer base in these areas. In addition, the stores can become showrooms for Amazon products, such as Alexa, that have been optimized to allow consumers to shop more easily on the Amazon website.
- Third, and related, is that as Amazon gets access to the Whole Foods customer base, Whole Foods shoppers who are not big Amazon buyers may be tempted to sign on with a Prime bundle designed specifically to appeal to them.
- Fourth, the company will get more out of customer data. By combining offline data from Whole Foods with online shopping data, Amazon may be able to further refine the scope of its product offerings.
- Fifth, with its experience in running its own operations efficiently, Amazon may help improve the efficiency of Whole Foods operations. From sourcing and dynamic replenishment to dynamic pricing and streamlined store operations, there are many ways in which the companies may be able to lower costs while enhancing the overall customer experience.
Other reasons: the retail locations can become sites where customers who find store returns convenient can return products purchased on Amazon, rather than go to the post office or UPS store. Also, the acquisition gives Amazon access to a set of retail employees considered some of the most customer-centric in the business, and who may help Amazon better understand ways of enhancing employee satisfaction at Amazon itself. Ultimately, as many marketers have pointed out, the profit chain runs through both employees and customers.
The acquisition also gives Amazon access to Whole Foods’ private-label product line 365. Recall the customer’s journey for detergent. The one factor that Amazon still has no control over is the detergent itself, since detergents are manufactured by outside companies. Because this limits Amazon’s profit margins, the company has increasingly been launching its own products—AmazonBasics batteries and cords, for example. This own-brand push will be significantly enhanced by the 365 line from Whole Foods.
Many more reasons for the acquisition have been advanced, but as should now be clear, most of them fit into the broad rubric of enhancing Amazon’s scope, scale, and speed. Indeed, the acquisition also has a direct impact on some of the enablers: data, innovation, and platform.
While growing size, product, and service variety are clear advantages for now, Amazon cannot discount the possibility of upsetting customers as it engages more deeply in their lives. When I was recently on the site, trying to buy some cranberries, I was met with a dizzying array of products and processes including AmazonFresh, Amazon Prime Pantry, Amazon Prime, and a host of third-party sellers. These options, plus even more unique possible combinations, made me decide to buy the product elsewhere. In the end, I was unable to locate the right combination of product (organic cranberries in a 3 lb package), process (Prime), and price—even though I knew that the right combination existed somewhere in the multitude of search results.
I find there’s typically a movie quote for every situation—and in this case, a perfect one comes to mind. Toward the end of The Lincoln Lawyer, the title character, Mick Haller (played with gusto by Matthew McConaughey), offers his services for free to a potential client. His chauffeur, Earl (played by Laurence Mason), overhears this generous offer and asks, “Are you all right?” To this Haller replies, “Repeat customers, Earl. We’ll stick it to ’em next time.” As Amazon scoops up customers who become more reliant on it, these customers should hope that the company does not behave like Haller and stick it to them down the line.
Pradeep K. Chintagunta is Joseph T. and Bernice S. Lewis Distinguished Service Professor of Marketing at Chicago Booth. He blogs at kiltscenter.tumblr.com. He thanks Booth MBA student Yogesh Kansal for his feedback and input.